For years, when institutional investors talked about the makeup of their emerging-market (EM) bond portfolios, they were talking about currency. Some bonds would be denominated in US dollars, others in the local currency of the issuing country—Mexican pesos, for example, or Chinese renminbi. But nearly all were sovereign bonds.

EM corporate bonds have historically been relegated to the periphery of fixed-income portfolios—if they’re represented at all. There was $113 billion benchmarked to J.P. Morgan’s EM corporate indices as of June 30, about one-sixth of the amount tied to its hard- and local-currency sovereign indices.

This under-allocation may have been understandable a decade ago when the outstanding debt stock was lower and less diversified. It isn’t anymore. The total EM corporate debt stock doubled between 2012 and 2018 to $2.3 trillion, about twice the amount of outstanding hard-currency EM sovereign debt. And the standard EM corporate benchmark, the J.P. Morgan CEMBI, encompasses bonds from more than 600 corporate issuers in 52 different countries (Display 1).

Widening the Opportunity Set

How investors add EM corporates to an existing fixed-income allocation will depend to some extent on their individual needs and comfort level. For institutional investors with dedicated EM mandates to hard- and local-currency sovereign bonds, it can be as easy as adding a stand-alone allocation to EM corporates.

An allocation to corporate debt provides diversification through exposure to more countries and to different parts of the credit cycle. It also gives investors access to a wider range of issuers in different sectors, often with a spread pickup over EM sovereign debt.